This Week

Last week ultimately saw only a modest decline in the SPX, but the midweek stretch of three straight down days brought brief bouts of heightened volatility, driven in part by the post-FOMC rebound in treasury yields. The week also featured some cooling in AI-related enthusiasm, with ORCL now down about -20% from its September highs. Despite that, the SPX remains less than -1% below its recent peak. For now it feels more like some consolidation or a breather and less major concerns just yet. Futures have opened flat Sunday evening. The next key macro input into the story comes this Friday with the September jobs numbers. More on what the market faces next in a moment—but first, a quick look at the weekend’s headlines:

• US Stock Rally Cools as October Turbulence, Earnings Season Loom (Bloomberg)

  • While the third quarter is ending with the S&P 500 Index (^SPX) on track for another advance, the mood seemed to shift, however slightly, at the end of last week. The equity benchmark fell three straight days — hardly alarming, but still the longest slump in a month — before pushing higher Friday. It’s up less than 1% since the Federal Reserve’s rate cut Sept. 17, and the weakness has been broad-based, with Big Tech sliding along with consumer stocks, materials producers and health-care companies.

  • Positioning data, though, suggest investors are leaning into bets for a year-end rally. Volatility remains well below its long-term average, and derivatives markets show traders paying more to protect against a melt-up than a downturn.

• 'The new normal': Wall Street says high stock valuations may be here to stay (Yahoo Finance)

  • With the S&P 500 trading near record highs and valuations approaching levels last seen during the dot-com bubble, strategists are rethinking what normal looks like for today’s market.

• Tariffs Aren’t Hitting Earnings—Yet. Why That Might Not Last. (Barron’s)

  • The impact of President Donald Trump’s sweeping tariffs has been muted so far, largely due to the maneuvering companies have been quietly doing behind the scenes.

• ‘AI’s not a bubble but if it were, here’s how it might pop’ (FT)

  • However, aggressive demand assumptions run the risk of a supply mismatch, given the speed and magnitude of the AI build-out. Mistiming or misallocation of capex is an occasional challenge for mega-cap Tech (think AMZN’s near-doubling of fulfillment capacity post-COVID, or META’s pursuit of Reality Labs), illustrating the inherent difficulty in planning for potentially very strong growth. But capex/sales for the hyperscalers has risen to levels rarely seen since the dotcom bubble, which was a textbook example of excessive upfront infrastructure spending fueled by a mismatch between expected and actual demand. Essentially, what if we do not actually need all of this compute?

• Trump threatens mass firings of federal workers if government shutdown isn’t averted (CNBC)

  • The White House is doubling down on warnings that thousands of government jobs could be on the line if the government shuts down at midnight on Tuesday. The Trump administration last week told federal agencies to begin preparing for mass firings if Congress does not agree to a deal to avert a shutdown. If the White House follows through on its threat, it would mark a break from precedent, as federal employees are typically furloughed in such cases.

• A look at OpenAI’s tangled web of dealmaking (CNBC)

  • The Nasdaq and S&P 500 rose to record highs this week after Nvidia agreed to invest up to $100 billion in OpenAI. That followed a $300 billion deal between OpenAI and Oracle in July as part of the the Stargate program, a $500 billion infrastructure project that’s also being funded by SoftBank. Its commitments don’t stop there. CoreWeave on Thursday said it’s agreed to provide OpenAI up to $22.4 billion in AI infrastructure, an increase from the $11.9 billion it initially announced in March. Earlier this month, chipmaker Broadcom said it had secured a new $10 billion customer, and analysts were quick to point to OpenAI.
    

Short duration implied volatility remains subdued with SPX pricing in just a 1.2% move for the week. Despite the upcoming NFP jobs report on Friday, the market has yet to price in much volatility. That’s likely to change by midweek when implied vols for Friday should begin to tick higher.

This Week’s Expected Moves:

• SPX/SPY: 1.2% (6550-6725)

  • QQQ: 1.6%

  • IWM: 2%

  • TLT: 1.3%

  • USO: 3.2%

One interesting aspect of the expected moves is that IWM—after showing notable (higher) divergence in volatility expectations compared to QQQ and SPY in recent weeks—is coming back to earth, likely due to its recent failed breakout above multi-year highs. It is the small caps side of the market most likely to see a ‘stocks higher - vol higher” scenario on a breakout.

As far as economic data this week, NFP on Friday but of course other labor market data before that, ISM Manufacturing and more:

Economic Calendar: (consensus)

• Monday

  • Fed Speak - Waller, Musalem, Williams, Bostic

  • 10am -

• Tuesday

  • 9:45am - Chicago PMI (40)

  • 10am - JOLTS Job Openings (7.1m)

  • 10am - Consumer Confidence

• Wednesday

  • 8:15am - ADP Employment (35k)

  • 10am - ISM Manufacturing PMI (49.2)

• Thursday

  • 7:30am -Challenger Job Cuts

  • 8:30am - Initial Jobless Claims (220k)

  • 10am - Factory Orders (0.1%)

• Friday

  • 8:30am - Non-Farm Payrolls (39k)

  • 10am - ISM Services PMI (52)

As far as earnings, really thin the next week and a half before we flip the calendar with bank earnings mid October. This week does see a Nike report Tuesday after the close:

Earnings (with expected moves):

• Monday

  • Pre-market: CCL 6.5%

  • After-hours: PRGS 6%

• Tuesday

  • After-hours: NKE 7.5%

• Wednesday

  • Pre-market: CAG 5%

One final point: It was hard to pin down exactly what last week’s action represented. From a volatility standpoint, traders seem to view it as a pause or consolidation within the ongoing rally. That interpretation fits, given that treasury yields failed to follow through post FOMC—likely sapping some of the market’s breakout momentum. Traders also appear relatively unconcerned about this week’s Jobs Report, and the market’s reaction to a major beat or miss could be counterintuitive if future Fed cuts/yields are what traders are looking for to guide the next equity move. It should also be noted that the impending government shutdown (Tues-Wednesday) isn’t showing up as a major worry yet amongst traders.

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